When the market is going up, it is highly likely that any ETFs you own will also be going up in value. Of course, some sectors might be out-of-favor, so if you buy a sector fund like energy or technology you might see those go down when the market in general is going up.
There is another class of ETF that is banking on the reality that the market can and will go down. These are called “inverse ETFs” because they perform opposite to the market. If the S&P 500 goes down, then the inverse ETF that tracks the index will go up. Some are even 2x or 3x. That means you could have big gains if the market goes down. On the flip side, you can also have huge losses!
Kevin B. Johnston wrote an Investopedia article called “Top 4 Inverse ETFs for a Bear Market.” The link for this is at the end of this post. The ETFs he highlighted were SH, SDS, SPXU and RWM.
Here is a summary of the four:
Ticker Name Expense Ratio
SH ProShares Short S&P500 0.89%
SDS ProShares UltraShort S&P500 0.90%
SPXU ProShares UltraPro Short S&P500 0.91%
RWM ProShares Short Russell2000 0.95%
This sounds attractive to the person who has a short-term focus. If you, for example, that the next month would be a down month for the stock market, then buying one of these could actually cause you to make money when everyone else was panic-selling. However, these do not make sense as large holdings in your portfolio if you have a long-term perspective. The reason is simple, over the long haul it is very likely you would lose money investing in these funds.
When considering an ETF, be careful to understand the nature of the inverse ETF. Don’t buy it if you are a long-term investor.